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Complying With State and Federal Laws in Marketing Agreements

Introduction

One of the major areas for financial liability for produce shippers is the contractual relationship with their growers. In a grower/shipper relationship, the shipper is an agent for the grower. This relationship is governed by the California Food and Agricultural Code (Agricultural Code) and the Perishable Agricultural Commodities Act (PACA). These laws are designed to protect the rights of growers. If a shipper does not properly comply with them, he could be liable for substantial payments to the grower.

By law, the extent of a shipper's authority as a grower's agent is limited absent a written agreement which explicitly sets forth what the grower authorizes the shipper to do in selling its produce. A well constructed written agreement, which complies with all federal and state laws, will protect both the grower and shipper in the event any disputes arise.

California Law

The Agricultural Code provides strict restrictions on the relationship between a grower and its sales agent. Several sections of the Agricultural Code directly impact grower marketing agreements because they govern the relationship between the grower and an agent.

Agricultural Code '56271 provides for records that the agent must keep and requires that lot numbers must appear on each individual farm product container.

Agricultural Code '56272 requires the agent to account for the quantity sold and selling price by the close of the next business day, if requested by a grower.

Agricultural Code '56273.1 states in detail the information that must be included in an account of sale to the grower.

Agricultural Code '56280 requires that each agent notify its grower in writing prior to the shipping season of the agricultural code provisions and that no downward price adjustment can be made without an inspection.

Agricultural Code '56280.5 states that any agreement waiving a right guaranteed by the Agricultural Code shall be set forth in the exact language of the provision of the code being waived.

Agricultural Code '56281 provides that the provisions of these sections must be given to the grower in writing, stating the code sections verbatim.

Agricultural Code '56282 provides that the secretary may disallow all or part of an adjustment charged back to the grower if the secretary believes there is insufficient justification of the conditions or circumstances requiring the adjustment.

Agricultural Code '56351 provides that a produce buyer is not entitled to a credit against a produce seller for dumping produce unless it has secured a certificate by an appropriate agency that the produce was unfit for human consumption.

Growers and their agents can specifically waive these provisions. However, effective January 1, 1997, any such waivers must be entered into in writing before the shipping season and include the exact language from the codes which are waived.

California law on waivers is clear. For a waiver to be effective it must be voluntary, knowing and done with adequate awareness of the relevant circumstances and likely consequences of the waiver. The waiver is not effective unless the grower is fully informed of the existence of the right being waived, the meaning of the waiver, the effects of the waiver and a full understanding of the explanation of the waiver.

As a result, we recommend that rather than burying the waiver in the middle of an agreement, a separate consignor's form be drafted whereby the grower is asked to specifically waive each Agricultural Code section along with an explanation of what the section entails. Further, a copy of the relevant provisions of the Agricultural Code should be attached. This upfront method of providing the growers with their rights and their knowing waiver of those rights will benefit both the grower and the shipper.

PACA Law

The Federal PACA Statute and the Regulations provide that agreements between growers and their agents must be in writing. Alternatively, in lieu of a written contract, a shipper can provide a grower with written notice prior to the shipping season of the terms under which it will handle the grower's crop. It is deemed a violation of the PACA Statute for a grower to fail to reduce the agreements in writing. A shipper who fails to reduce its agreement with its grower to writing does so at its own peril. PACA sets forth strict requirements for maintaining detailed accountings covering all aspects of handling of produce. Shippers are required to include disclosure of all fees and services that they will charge back to the grower. If not disclosed and accounted for properly, the shipper runs the risk of not being able to charge the grower for certain expenses. Under PACA, as in the Agricultural Code, the grower and its shipper can contract for almost any terms they desire as long as the terms are up front, understood by all parties and reduced to writing.

Contract Provisions

There are many contractual provisions which should be included in marketing and sales agreements. Below is a description of common provisions which must be modified and adapted as each relationship requires.

General Provisions

Most marketing agreements open with general provisions which include the identity of the parties, their legal capacity to enter into the agreement, the land on which the produce will be grown, a complete description of the crop to be harvested and whether the agreement is providing the exclusive right to sell the product.

Duration of the Agreement

The duration of the agreement should be clearly stated including when the agreement terminates and how it can be renewed by the parties.

Growers' Duties

A grower's duties should specifically set forth how the grower will grow the crop and the specific tasks for which they are responsible. These tasks may include harvesting, grading and packing of produce. It should also be made clear which party pays for any duties set forth.

Agent's Duties and Authority

The duties of the agent or shipper to be performed must be listed in detail including harvesting, hauling, grading, packing, selling and shipping. It is important to set forth whether the grower or the shipper has the authority to determine the method of grading and whether to discontinue selling due to quality or market conditions.

Since the agent's authority is limited, the agreement should completely set forth the shipper's authority to dispose of the crop including some of the following:

Sell on consignment or through brokers.

Grant credits and price adjustments.

Pool with other growers.

Select packing materials.

Sell FOB or delivered.

Determine the credit risk.

Set advanced prices.

Grant volume discounts.

Abandon sales due to price or quality.

Independent Contractors

The agreement should not create, or be construed as creating, the relationship of principal and agent, employer or employee, partners or joint venturers. Failure to make clear that the parties are independent can make one of the parties responsible for the mistakes of the other.

Commission and Charges

A shipper's sales commission and specific fixed charges for various products and services must be fully set forth.

Accounting and Payment to Grower

The agreement should set forth the due date for final accounting and final payment. A word of caution: agreements that call for payment beyond thirty days after the shipper gains custody and control of the produce will result in the loss of the grower's right for PACA trust protection in the event the agent becomes insolvent and has a difficult time remitting payment for the produce.

Credit and Collection

The agreement should specify which party is responsible for incurring the risk of nonpayment, cost of collection and filing and prosecuting claims.

Breach and Remedies

The events giving rise to default and the remedies for the aggrieved party should be clearly spelled out in the agreement.

Insurance and Indemnity

In light of the concerns that have been expressed by the government and the media about food safety, the agreement cannot ignore the issue of liability for failure to comply with federal food standards such as the Federal Food, Drug and Cosmetic Act and Federal Hazardous Substances Labeling Act. The recent incident involving tainted E. Coli strawberries is a good example of what may possibly happen. We suggest a provision that requires the grower to maintain insurance and to indemnify the shipper if its actions result in any lawsuits. Shippers realize that these concerns are passed down through the distribution channel and are aware that several major supermarkets are requiring its produce suppliers to indemnify them for claims or damages incurred as a result of injury or illness arising out of the consumption of tainted produce.

Notices

The agreement should specify how and where notices to the other party under the agreement should be transmitted.

Cost of Enforcement

A provision may be added whereby if either party is forced to enforce the agreement against the other, the prevailing party will pay the other's attorneys' fees and costs.

Acts of God

Should performance of the agreement by either party be prevented or delayed by any act of God or other causes beyond the reasonable control of any party, the party's performance will be excused to the extent it is thus prevented and delayed.

Governing Law

The agreement should set forth under which laws and where the contract will be interpreted if an enforcement action is brought by either party.

Liens on Crop

A grower should warrant that it has a legal right to the crop and there are no encumbrances against it and will list the specific encumbrances. The agreement should set forth the remedy if an unknown claim is brought.

Arbitration

The agreement may provide that a dispute arising under the contract be settled through arbitration. The 1998 Amendments to the Agricultural Code encourage resolution of disputes by arbitration. Officials of the PACA branch of the USDA have indicated that if a dispute is brought before it and the parties have an arbitration agreement in their contract, PACA does not have jurisdiction to hear the dispute. Thus, the grower and its shipper can keep the government out of their private dispute by including an arbitration provision.

This may be good or bad, depending on the party's perspective. PACA's involvement in a dispute provides for a governmental agency with knowledge of the produce industry to investigate the allegations. The dispute is heard before a presiding officer well versed in the produce industry. Alternatively, under arbitration, the parties must pay for and initiate their own investigation. Further, they must pay an arbitrator, who may not be well versed in produce sales disputes, to decide the matter.

In addition to deciding whether or not to include an arbitration provision, the parties may elect as to which rules of arbitration apply to any disputes. These rules include those set forth by the Commercial Arbitration Rules of the American Arbitration Association or the California Civil Procedure Code. MD&K prefer Rules of the American Arbitration Association because they tend to be more streamlined than the California Civil Procedure Code. In California, there are more opportunities for a court to find an arbitration provision to be unenforceable.

COMPLEXITY OF AGREEMENTS

The requirements of the Agricultural Code which are necessary to a proper marketing agreement intimidate many produce growers. No one wants an over-complicated agreement. However, in a quest to simplify, the intent of the agreement to protect the parties against all contingencies should not be lost. If a dispute does arise, the dispute will be resolved primarily by what is contained in the four corners of the agreement. A good contract is one that is clearly written, is understood by all parties, and is as brief as possible while protecting the parties.

Sometimes buyers require that their customers sign agreements prior to purchasing produce from them which extend liability well beyond the point of shipment. Such agreements are called guaranty, hold harmless or indemnification agreements. Meuers, Dressler & Kerr, LLP (MD&K) and Western Growers' Association (WGA) are opposed to such agreements and caution produce sellers to carefully consider the need to assume additional liability.

MD&K has prepared a guaranty form for sellers to use with their buyers addressing all the state and federal regulations applicable to their control over the produce.

One major supermarket chain, Kroger Co., wants its produce suppliers to sign a guaranty form prior to buying produce from them, which extends the shipper's liability beyond the point of shipment. Currently, Douglas Kerr is discussing our concerns with Kroger. Kroger has agreed not to mandate shippers to sign the agreement during these discussions.

Before signing any agreement which extends a shipper's liability beyond the point of shipment, MD&K and WGA strongly recommend that you contact Douglas Kerr or Tom Oliveri at 239-513-9191; or Larry Meuers at 1-888-241-PACA

1998 CALIFORNIA AGRICULTURAL CODE CHANGES

Effective January 1, 1998, several changes went into effect in California's Food and Agricultural Code which effect both produce growers and dealers.

Dispute Resolution

The new law requires an aggrieved grower or licensee with a complaint to first seek resolution of the complaint by filing the complaint under PACA or the Federal Packers and Stockyard Act. (PSA) Only after one of these federal agencies sends the aggrieved party a letter denying jurisdiction may a complaint be brought before the Department of Food and Agriculture, Bureau of Market Enforcement (Bureau).

The federal agencies, including PACA and PSA, require the element of "interstate commerce" before assuming to have jurisdiction over the dispute. Traditionally, federal agencies only have jurisdiction if the commodities in question cross state lines, or were sold in contemplation of interstate commerce. Caselaw interpreting interstate commerce makes the definition very broad, and it is difficult to contemplate a circumstance, especially between a grower and its agent, where PACA or PSA would not have jurisdiction.

The amended law provides that a licensee may elect to use alternate dispute resolution (ADR) to resolve its disputes through arbitration if such provision is included in a contract between the parties. Either party may elect to proceed with ADR to resolve the dispute.

If the written agreement does not provide for ADR and a federal agency does not have jurisdiction, a complaint may be brought before the Bureau. After an answer, the Bureau will issue both parties a written factual summary based on the documents that have been filed with the Bureau. If a settlement is not reached within thirty (30) calendar days after the Bureau's summary is issued, either party may pay $300.00, and elect to use ADR, which must commence within ninety (90) calendar days.

The ADR shall be conducted by a hearing officer selected by and in accordance with the standard procedures promulgated by the American Arbitration Association. The parties to the dispute may represent themselves before the ADR or may be represented by a licensed attorney. A party may not be represented by a representative who is not licensed to practice law.

The Bureau retains jurisdiction over the dispute if the parties fail to perform in accordance with any ADR procedure or award made in accordance with a written contract.

The new law's emphasis on arbitrating disputes using ADR is consistent with MD&K's view that ADR should be strongly looked at in commercial agreements between produce industry members. The wise use of ADR can benefit all parties to a transaction.

Farm Products & Trust Fund

Prior law provided for a Farm Products Trust Fund. Pursuant to the regulatory scheme, each processor of farm products or produce dealer was required to pay to the Secretary an annual fee of $125.00, before the Secretary issues or renews its license. All fees were collected and used to pay for unpaid products grown or produced within California.

The new law provides that no claims may be made against the fund after January 1, 1998, and no assessments may be collected for deposit into the trust fund after January 1, 1999. The Bureau will continue to administer the Products Fund for the purpose of paying charges for claims made prior to December 31, 1997.

Upon completion of the last of these claims, the Products Fund shall cease to exist and any funds remaining on deposit shall be distributed on a pro-rata basis to the then, existing licensee.

Call experienced produce law attorneys at 239-513-9191

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